Housing Group Taps Dubious Data, HUD Ties to Demand Millions from Banks

First in a series

The National Fair Housing Alliance held a pair of teleconferences over the past two months during which its president, Shanna Smith, accused two of the nation's biggest banks of a deplorable corporate crime: racial discrimination.

Bank of America (BAC) and U.S. Bancorp (USB) did a terrible job of maintaining homes they'd foreclosed on in predominately black and Hispanic neighborhoods, Smith declared, even as they were fastidious about upkeep in mostly white areas. The claims were a repeat of those the Washington, D.C.-based nonprofit has made during more than a half-dozen other teleconferences over the last year.

During its public events, the NFHA has pointed to photos of run-down properties, trash-strewn yards and even one of a dead dog, to bolster its claims that poor property management by banks is dragging down entire minority neighborhoods. The NFHA nicknamed one such property, a Baltimore foreclosure, "The Rat House." Not only are such homes hurting property values but they're also contributing to community health epidemics, like asthma, allergies, lead poisoning and obesity, Smith told the journalists and others assembled by phone.

"The banks have liability for the harm that they're causing. If you live next door to an REO home, you are being injured and the banks have liability for that," Smith said in an October interview. REO, or real-estate-owned, is an industry term for homes seized by banks through foreclosure.

The NFHA is seeking tens of millions of dollars from Bank of America and U.S. Bank as a result of their alleged misdeeds. In April, it finalized a $42 million settlement with Wells Fargo over similar claims that provided a financial windfall for the NFHA and its local member organizations.

A review of the NFHA's cases raises doubts about the validity of its claims, however. The group has disclosed addresses for only a fraction of the properties it alleges the banks have neglected, but a review of those it has released indicates that NFHA regularly misidentified the institution legally responsible for maintaining specific homes. In some cases, it conflated the banks responsible for maintaining properties with those that were simply serving as trustees for mortgage-bond investors. In others, it faulted banks for damage that occurred before they took possession of properties.

Not in dispute is the leverage the NFHA has gained in its dealings with banks from its close ties to supporters in the federal government. Unusual among Washington agencies, the Department of Housing and Urban Development both funds housing discrimination investigations by nonprofits, including by the NFHA, and provides the venue for them to negotiate their claims.

Sara Pratt, the HUD official responsible for investigating and resolving the NFHA's complaints, and who oversaw its settlement with Wells Fargo, is a former NFHA staffer and consultant. HUD and the NFHA dismiss the significance of Pratt's former affiliation; bank industry representatives counter that it poses a troubling conflict of interest.

"Having a senior HUD enforcement official supervising these cases who is a former NFHA employee undermines the credibility of this process," says Andrew Sandler, a Washington, D.C. attorney who chairs Buckley Sandler LLP and represents big banks but is not directly involved in the housing claims.

Testing Legal Boundaries

Sweeping, controversial civil rights cases are a stock-in-trade for the NFHA under Smith. A blunt Toledo native who worked her way from Ohio housing activist to Washington powerbroker, Smith has proven adept at marshaling the resources of scores of groups around the country to magnify the NFHA's leverage.

Founded in 1988 as a volunteer effort by five fair housing groups, NFHA was instrumental in the 1990s in bringing to the national consciousness banks' practice of redlining, or refusing to lend in minority neighborhoods. The group raised its profile further by conducting fair housing "testing," in which it dispatched volunteers to apply for loans, shop for insurance and monitor whether homebuilders were complying with the Americans with Disabilities Act. When the group has found what it regards as evidence of discrimination, it has filed complaints with the HUD and courts, relying on proceeds from its victories to help fund its operations.

With 21 full-time employees, NFHA calls itself the nation's preeminent fair housing advocate and actively courts big legal fights. In November it partnered with billionaire George Soros' Open Society Institute and the Ford Foundation to pull together enough cash to convince the town of Mt. Holly, New Jersey to drop a Supreme Court challenge to disparate impact — the hot-button legal theory that banks and other real estate service providers can be held liable under the Fair Housing Act for discrimination that's entirely unintentional. Quashing Mt. Holly's suit has, at least temporarily, protected a legal doctrine on which the NFHA regularly relies.

Despite the controversy surrounding the NFHA's tactics, banking industry sources acknowledge that high concentrations of foreclosed properties harm neighborhoods. Mortgage servicers, who are responsible for the upkeep of homes in foreclosure, have long recognized that even well-maintained vacant properties are at heightened risk of arson and vandalism.

There's also ample evidence that mortgage servicers have often done a poor job of upkeep in the wake of the housing collapse. Cities from Riverside, Calif. to Allentown, Penn. have publicly grappled with post-foreclosure blight, and children in Florida and Indiana have drowned after falling into the unsecured backyard pools of foreclosed homes. Like numerous housing activists, the NFHA blames banks for such troubles, and it has thrown itself into the debate over foreclosures, loan modifications and banks' responsibilities toward hard-hit communities.

What sets the NFHA apart is its view that banks' perceived lapses offer abundant opportunities to pursue racial discrimination claims under the Fair Housing Act. Critics say it's a stretch for the NFHA to sue banks for allegedly neglecting empty homes in foreclosure under the law, which was passed in 1968 with the aim of providing protection for those seeking to buy or rent residences.

HUD Help, Dubious Data

The NFHA originally funded its REO discrimination investigation in part with modest grants from HUD and Fannie Mae. The NFHA inspected 264 homes in four cities, according to HUD grant documentation obtained through a Freedom of Information Act request. It then graded the properties on factors ranging from structural integrity to "curb appeal" and declared that it had uncovered widespread discrimination.

"Are lenders/servicers maintaining foreclosed homes in neighborhoods of color in a manner similar to predominately White neighborhoods? NO," the group wrote. The NFHA responded by teaming up with Washington, D.C. law firm Relman, Dane & Colfax, a frequent legal partner, and discussing with HUD and the Justice Department's fair housing enforcement staff an expansion of its investigation. It also published a report in 2009 titled "Here Comes the Bank, There Goes Our Neighborhood."

That scaled-up investigation - funded with additional HUD grants - provided the material for NFHA's 2012 HUD complaints against Wells Fargo, Bank of America, and U.S. Bancorp. In press conferences announcing the Bank of America filing, Smith declared that its "disregard and disrespect for communities of color will not be tolerated." The bank had "no excuse" for the condition of the properties, Smith said, because the NFHA had put B of A "on notice" about the problems more than two years earlier.

Putting Bank of America "on notice" did not include providing it with addresses for the overwhelming majority of the properties that NFHA claims the bank neglected - information that the bank requested and would seem crucial if NFHA's goal was to ensure that the homes were quickly repaired.

"When they [the banks] are willing to cooperate with this investigation, then they will get the addresses," NFHA's Smith said during an October 2013 press conference. "Besides," she added during a subsequent interview, "we wouldn't file a complaint against someone who doesn't have liability."

Bank of America spokesman Dan Frahm voiced frustration over NFHA's withholding of most of the addresses on which it has based its claims. In the minority it has identified, the group is "pointing to properties we are not responsible for or others we have long since helped transition to new homeowners," he said.

The NFHA's original study "was undertaken solely for the purpose of filing HUD complaints accompanied by press releases and obtaining big settlements," adds Sandler, the bank defense attorney. "NFHA will not share information [about specific properties] because it knows that exposing the basis for its allegations will empirically demonstrate them to be false and misleading."

Home Court Advantage

Withholding evidence until a bank agrees to cooperate would not pass muster in a court of law. Fortunately for the NFHA, it has found a more forgiving venue in which to press its cases: HUD's Office of Fair Housing and Equal Opportunity. It's the same office that funded NFHA's 2009 investigation and whose boss, Sara Pratt, is a former NFHA official and consultant.

Pratt, a University of Arizona-trained lawyer, has made a career out of pursuing housing discrimination cases. After working as a civil rights attorney in Kentucky, she spent six years until 1999 as a HUD director of enforcement before moving into the same role at NFHA.

She launched her own fair housing consultancy, Sara Pratt and Associates, in 2001, while continuing to work for the NFHA as a strategist and faculty member at its fair housing training school. Some of her advocacy work for NFHA appears to relate directly to the REO enforcement work she now oversees at HUD.

In 2008, Pratt was the primary author of a 99-page report, "The Future of Fair Housing," sponsored by the NFHA and allied civil rights advocacy groups. The paper recommended that the government look closely at fair housing and REO marketing. It also declared that HUD's funding for fair housing groups like NFHA and its members was "grossly inadequate." In 2009, she published an NFHA-commissioned paper on the "need for action" to strengthen HUD's disparate impact discrimination regulations.

Pratt returned the following year to HUD, where she is the Deputy Assistant Secretary for Enforcement and Programs in the Office of Fair Housing and Equal Opportunity. Requests to interview Pratt were declined through a HUD spokesman.

During Pratt's first year back at HUD, she was subject to the same prohibitions as other federal employees against work involving parties for which she'd previously served as an employee or consultant, said HUD General Counsel Helen Kanovsky . Another senior HUD official, who agreed to speak on the condition that his name not be used, dismissed suggestions that Pratt's history might have biased her in favor of the NFHA.

"Sara Pratt had nothing to with the design or implementation of NFHA's REO investigation," Smith says.

What is beyond dispute is that Pratt and her HUD unit investigated the banks and worked with NFHA to negotiate its lone completed settlement. In April, Wells Fargo agreed to pay $42 million to settle claims that it had mismanaged REO properties.

The agreement yielded more than $30 million in grants for the NFHA and its affiliates via six separate channels. That sum is unremarkable in the world of megabank settlements, but it amounted to major financial coup for housing groups. The bulk of the funds, $27 million, went to grants to 19 local NFHA affiliates. The Greater New Orleans Fair Housing Center and North Texas Fair Housing Center, for example, will receive $1.4 million each, which is more than double their annual revenues in recent years, Internal Revenue Service filings show.

Beyond the grants, Wells was further required to: reimburse NFHA for $3 million in legal expenses; sponsor two NFHA conferences at a cost of $150,000 each, including meals and travel stipends for speakers; and pay $250,000 to cover the cost of NFHA community seminars on delinquencies, foreclosures and REO properties.

The deal additionally stipulates that Wells will pay NFHA to review a "fair housing training module" to be released to the public and requires the bank to pay NFHA an undisclosed hourly fee for consulting in three areas: production of fair housing training materials for the public; monitoring of the bank's REO portfolio; and identification of additional communities in which to conduct monitoring.

HUD's $11 million portion of the settlement is just one-third as large as NFHA's. Individual homeowners will receive no compensation, and there is no requirement that Wells Fargo improve its foreclosure maintenance beyond its existing best-practice standards. In addition to helping NFHA negotiate the deal, HUD's Pratt signed the settlement document on behalf of the government.

Reputational Risks

Wells may have been a relatively easy mark for NFHA. The bank previously paid $175 million to the city of Baltimore to settle allegations that it had steered African-American and Hispanic borrowers into high-cost, subprime loans and contributed to a cascade of inner-city defaults and blight.

As the nation's largest mortgage servicer, it is responsible for collecting payments, working with troubled borrowers and handling foreclosures for millions of homes. The bank and its chief executive officer, John Stumpf, have also been the target of numerous hecklers and demonstrations by those claiming it has abused homeowners.

Wells declined comment on why it settled. One alternative would have been to shun HUD's administrative process and resort to the courts — a move that could have provoked both a costly fight with the government and further bad publicity.

Sandler, the bank attorney, declined to comment on specific lenders but says HUD's procedures - and the NFHA's connections - have left banks cornered. Based purely on the legal merits, banks would be well advised to refuse to cut deals with the NFHA and litigate instead, he says.

"However, that can be hard for a bank to do when HUD adopts NFHA's claims without meaningful evaluation of their merit and demands that the bank settle with NFHA or face prolonged government enforcement proceedings," Sandler says.

Next: A close look at the NFHA's evidence of wrongdoing and financial incentives raises questions about whether the real victims are minority homeowners or banks and their shareholders.